As revenue from taxing families’ inheritances continues to dwindle, Delaware lawmakers are proposing a repeal of the state’s estate tax, also called the “death tax.”
Caesar Rodney Institute President John Stapleford says Delaware’s estate tax has only been in effect for a few years, but its effects are already noticeable.
“When the federal estate law was modified in 2001, Delaware lawmakers dropped the original state estate tax because they couldn’t pass the burden off at the federal level,” Stapleford said.
Delaware allowed its estate tax to expire in 2001 after President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 into law, removing federal tax credits for state estate tax payments.
“As the country came out of the recent recession, Delaware reinstituted the estate tax in 2011 on larger estates,” said Stapleford.
Voting ‘With Their Feet’
Stapleford says Delaware’s estate tax revenues have dropped significantly over the past few years.
“Since many wealthy Delaware families have homes in other states that have no income or estate taxes, the result was the natural human response that if you tax something you’ll get less of it,” Stapleford said. “So people voted with their feet. … The outcome has been a drop in estate tax revenue from $16 million in 2011 to $12 million, to $5 million, and finally to $1.3 million in 2014.”
Stapleford says the death tax discourages investment and entrepreneurship.
“The latest data from the Forbes list of the richest 400 families show that 70 percent are self-made—in other words, not inherited money,” Stapleford said. “Most of the remaining families are like the Waltons of Walmart; that is, the wealth came from starting a business. If you start penalizing the creation of wealth, you are going to get less wealth and an overall penalized economy.”
Temporary, Then Permanent
State Sen. Gary Simpson (R-Milford), the sponsor of the bill, says the four-year-old tax was intended to be a temporary measure.
“When the current Delaware estate tax was first reintroduced, it was sold as a temporary tax to balance the state balance,” he said. “It had a four-year sunset clause, but that clause was not activated.
“It was also projected to bring in $25 million annually in revenue. That revenue never materialized,” Simpson said.
Moving Out of Delaware
Simpson says the effects of the death tax outweigh its benefits.
“A tax attorney was quoted in one of Delaware’s daily papers [saying] that he lost five clients last year, each paying about $50,000 annually in personal income taxes,” Simpson said “That’s just one tax attorney, but it represents five lifetime income tax revenue losses. It just seemed to me a losing affair for Delaware to continue with the estate tax at the expense of 20 or 30 years of income tax receipts.”
Simpson says the estate tax takes people’s money that has already been taxed.
“Taxes have already been paid by the individual,” Simpson said. “The truly wealthy are paying many of the taxes in every state. This tax hurts their heirs.”
Tony Corvo ([email protected]) writes from Beavercreek, Ohio.